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Is MercadoLibre, Inc. a Buy?

The Latin American e-commerce giant has soared 149% since the start of last year, but it may not be too late to hop on the dot-com darling.

MercadoLibre(NASDAQ:MELI) shares more than doubled last year, and the leading Latin American online marketplace operator is on a pace for a repeat performance in 2018. MercadoLibre has soared another 23% through the first two months of this year.

Like a favorite child, it seems as if MercadoLibre can do no wrong. The stock initially took a hit after reporting mixed quarterly results last week. The company surprised the market with an unexpected loss for the period given an operating hiccup in Venezuela. It also suspended its dividend. The shares opened lower the day after its financial report, but the stock has gone on to hit fresh highs in each of the past four trading days.

Image source: MercadoLibre.

Heading north by going south

Revenue rose by a better-than-expected 71% in MercadoLibre's latest quarter, nearly doubling on a foreign exchange neutral basis. It clocked in with a reported deficit as a result of an $85.8 million loss following the deconsolidation of its Venezuelan operations, but it's not the lone scapegoat gnawing away on the bottom line. Margins contracted as a result of the free shipping and loyalty programs that MercadoLibre has been pushing to ramp up sales. Back out Venezuela and net income would've still declined by more than 80% for the quarter. Analysts were already bracing for contracting earnings, but the adjusted profit of $0.20 a share was more than 60% below where the pros were perched.

Wall Street is overlooking the near-term margin challenges, preferring to emphasize the scintillating market share gains across Latin America. A whopping $3.6 billion in gross merchandise volume was transaction through MercadoLibre during the fourth quarter, 63% ahead of the prior year's showing. Its MercadoPago payment platform and MercadoEnvios order fulfillment business grew even faster. MercadoPago helped process $4.3 billion in payments during the quarter, so clearly it's more than just a way to exchange funds for MercadoLibre transactions.

Sacrificing near-term profits for the sake of land-grab gains isn't a novel concept for stateside investors that have seen the e-commerce titans closer to home excel with that strategy. Wall Street's playing along. Andre Baggio at JPMorgan upgraded MercadoLibre from neutral to overweight this week, jacking up his price target from $270 to $500. He sees MercadoPago and MercadoLibre's other fintech initiatives growing at a better than 50% annualized clip in the coming years. We're also still early in the e-commerce migration cycle in many Latin American regions, giving MercadoLibre a high ceiling as the online and mobile revolutions play out.

You have to go all the way back to 2006 -- more than a decade -- to find the last time that MercadoLibre's revenue was growing as quickly as it did than the nearly 66% surge it experienced for all of 2017. Revenue growth should decelerate in 2018, but it should still be its second best year in terms of top-line growth in the past decade.

Suspending its dividend may seem to be a negative development, but it's not as if income investors were relying on the yield that had slipped to less than 0.2% given the rising stock price. MercadoLibre is better off putting that money to work on scaling up its businesses and launching new ventures including its transactional model for its classified ad platform and growing its fleet of MercadoPago-supporting mobile point-of-sale devices in the wild. The market isn't always kind to companies putting up with thinning margins in the pursuit of sales growth, but this is a niche where history shows it pays to bet on the company than against it. MercadoLibre is hitting new highs now, and it remains a buy until growth and momentum tell us otherwise.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends MercadoLibre. The Motley Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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